No Money? No Problem! Venezuelan Bonds Rally in Act of Faith

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Venezuela in Default After Missing Debt Payments

Despite reassurances from the Venezuelan government and state-run oil company that checks for past-due bond payments are in the mail, few investors have actually seen the money yet.

No matter. Bonds are rising, paring some of the selloff sparked by President Nicolas Maduro’s announcement Nov. 2 that he would seek to renegotiate the nation’s billions of dollars in overseas debt obligations. Investors have little choice but to take his word for it and assume the procedural delays in the payment chain, which have worsened since U.S. sanctions in late August, will eventually be worked out.

Petroleos de Venezuela SA bonds due in 2020, and backed by a stake in U.S. refining unit Citgo, have jumped to 83 cents on the dollar from a low of 69 cents last week. That puts them just 2 cents below where they were before the restructuring announcement. The yield on Venezuela’s benchmark 2027 notes -- while still deep in distressed territory at 36 percent -- is also near a two-week low. Not all securities are faring as well. A government bond maturing in less than 13 months is up 4.5 cents in the past two days to 37 cents on the dollar, though has a way to go to get back to the mid-60’s level of early November.

Rating companies have said both the government and oil company are in default, and officials are discussing whether a credit event occurred to trigger payments on credit-default swaps. But that’s a sideshow. For bond traders, the main game is keeping the faith.

Case in point, the state-run utility Electricidad de Caracas was deemed to be in default last week, causing the bond to tumble to 20 cents on the dollar. Today, investors were told by Euroclear that the late $28 million interest payment has finally arrived (it was due on Oct. 10), according to people familiar with the matter.

While systematically late in recent months, Venezuela is finding a way to pay.

— With assistance by Ben Bartenstein

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